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Edited Transcript of ACC earnings conference call or presentation 23-Oct-18 2:00pm GMT

Q3 2018 American Campus Communities Inc Earnings Call

AUSTIN Oct 23, 2018 (Thomson StreetEvents) -- Edited Transcript of American Campus Communities Inc earnings conference call or presentation Tuesday, October 23, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel B. Perry

American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary

* Jennifer Beese

American Campus Communities, Inc. - Executive VP & COO

* Ryan Dennison

American Campus Communities, Inc. - SVP, Capital Markets & IR

* William C. Bayless

American Campus Communities, Inc. - CEO & Director

* William W. Talbot

American Campus Communities, Inc. - Executive VP & CIO

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Conference Call Participants

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* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Alexander J. Kubicek

Robert W. Baird & Co. Incorporated, Research Division - Research Analyst

* Austin Todd Wurschmidt

KeyBanc Capital Markets Inc., Research Division - VP

* John Joseph Pawlowski

Green Street Advisors, LLC, Research Division - Senior Associate

* Juan Carlos Sanabria

BofA Merrill Lynch, Research Division - VP

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - VP and Senior Analyst

* Samir Upadhyay Khanal

Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the American Campus Communities, Inc. 2018 Third Quarter Earnings Conference Call. Today's call is being recorded. (Operator Instructions) I would like to remind everyone that this conference is now being recorded, and I would now like to turn the conference over to Ryan Dennison, Senior Vice President of Capital Markets and Investor Relations for American Campus Communities. Mr. Dennison, please go ahead.

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Ryan Dennison, American Campus Communities, Inc. - SVP, Capital Markets & IR [2]

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Thank you. Good morning, and thank you for joining the American Campus Communities 2018 Third Quarter Conference Call.

The press release was furnished on Form 8-K to provide access to the widest possible audience. In the release, the company has reconciled the non-GAAP financial measures to those directly comparable GAAP measures in accordance with Reg G requirements. Also posted on the company website in the Investor Relations section you will find an earnings materials package, which includes both the press release and a supplemental financial package.

We are hosting a live webcast for today's call, which you can access on the website, with the replay available for 1 month. Our supplemental analyst package and our webcast presentation are one and the same. Webcast slides may be advanced by you to facilitate following along.

Management will be making forward-looking statements today as referenced in the disclosure in the press release, in the supplemental financial package and in SEC filings. Management would like to inform you that certain statements made during this conference call, which are not historical fact may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 as amended by the Private Securities Litigation Reform Act of 1995.

Although the company believes the expectations reflected in any forward-looking statement are based on a reasonable assumption, they are subject to economic risks and uncertainties. The company can provide no assurance that its expectations will be achieved and actual results may vary.

Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release and from time to time in the company's periodic filings with the SEC. The company undertakes no obligations to advise or update any forward-looking statements to reflect the events or circumstances after the date of this release.

Having said that, I'd like now like to introduce the members of senior management joining us for the call: Bill Bayless, Chief Executive Officer; Jim Hopke, President; Jennifer Beese, Chief Operating Officer; William Talbot, Chief Investment Officer; Daniel Perry, Chief Financial Officer; Kim Voss, Chief Accounting Officer; and Jamie Wilhelm, EVP of Public-Private Transactions.

With that, I'll turn the call over to Bill for his opening remarks. Bill?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [3]

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Thank you, Ryan. Good morning, and thank you all for joining us as we discuss our third quarter 2018 financial and operating results.

As the team will detail during the call, the quarter was highlighted by the following: The successful completion of the 2018 lease-up, which positions us for our 14th consecutive year of growth in same store rental rate, rental revenue and NOI; strong internal growth with same store NOI for the quarter of 4.5% over Q3 of the prior year; the successful delivery of 10 high-quality core pedestrian assets on-time, under budget and fully stabilized at 97% opening occupancy; and further progress in regard to on-campus development awards.

Beyond American Campus' performance at the recent NMHC Student Housing Conference, industry participants reported another successful lease-up and a vibrant transaction market. Additionally, Axiometrics reports solid industry fundamentals nationally regarding the more than 453,000 beds same store portfolio, which they track, with core pedestrian assets located within 0.5 mile of their respective campuses increasing 50 bps to 95.1% in fall of 2018 from 94.6% in the prior year and with rental rates increasing by 1.7%. Axiometrics also expects new supply for fall of 2019 to decline nationally with a decrease of 6% to 14% based on how actual construction starts materialize.

In ACC markets, we're tracking new supply for fall of 2019 consistent with historical levels, with new supply representing approximately 1.3% of enrollment. While we are tracking approximately 28,000 new beds in fall of 2019 versus 26,000 this fall, it's important to note that next year's anticipated new supply is spread over 34 of our markets versus 26 markets this year, translating into a smaller number of new beds per market. It's also worth noting that the top 10 new supply markets for 2019 represent only 18% of our NOI versus this year's top 10, which represented 30% of our NOI.

Additionally, over 20 of the 34 new supply markets for next fall received no significant new supply in 2018.

We do expect new supply to continue to impact the Florida State market in the short term as 2,168 new beds are scheduled to come online in fall of 2019 in addition to the 2,375 beds that came online in the fall of 2018, with the overall market occupancy only reaching 90% in this fall.

Overall, broad industry fundamentals remain healthy, and we look forward to another successful lease-up for the fall 2019-2020 academic year.

With that, I will turn it over to Jennifer Beese, our Chief Operating Officer, to provide additional color on our operational results.

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Jennifer Beese, American Campus Communities, Inc. - Executive VP & COO [4]

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Thanks, Bill. As Bill mentioned, our third quarter 2018 same store operational results were in line with our expectations. As seen on Page S-5 of the supplemental, quarterly same store property NOI increased by 4.5% on a 2% increase in revenues and a decrease in operating expenses of 0.2%, consistent with the quarterly growth profile outlined in prior calls. Our 2% third quarter revenue increase reflects a combination of the '17-'18 and '18-'19 academic years.

Our expense profile in the third quarter was largely in line with our expectations, with the majority of our expense category showing savings or inflationary growth. We are very pleased with our controllable expense categories, both for the quarter and year-to-date, with Q3 resulting in controllable expense savings of 1.5% and year-to-date controllable expense growth of only 0.7%. These results have been positively impacted by our Asset Management focus on items such as utilities, where we will continue to benefit from additional phases of our LED lighting initiative as well as leveraging our national purchasing power with our cable and Internet providers.

Turning to Leasing. As Bill highlighted, both our 2019 same store portfolio and our 2018 development in presale properties were 97% occupied on September 30. The ACC team did an outstanding job of once again producing industry-leading leasing results, and we are especially pleased to have returned to our long-term track record of opening our new properties fully stabilized.

Based on our initial rate setting and occupancy projections for the '19-'20 academic year, our 2020 same store properties are expected to produce opening fall rental revenue growth ranging from 1.5% to 3%.

Since our portfolio finished this lease-up at an occupancy level consistent with our long-term average of approximately 97%, we expect the majority of this revenue growth will be driven by rental rate increases. We look forward to updating the market on our next call with the specifics of our 2019 guidance expectations.

I will now turn the call over to William to discuss our investment activity.

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William W. Talbot, American Campus Communities, Inc. - Executive VP & CIO [5]

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Thanks, Jennifer. Turning first to development, we successfully delivered 10 owned assets and presales this fall totaling almost 7,000 beds and $670 million in cost. All of these projects were delivered on time and on budget with starting fall occupancy of 97%. Development remains our top investment priority with yields in excess of 200 basis points above current market cap rates for similar product. We continue to build our future delivery of owned developments with the execution of the ground lease and started construction of the 584-bed apartment community on the campus of San Francisco State. The $129 million project represents the first private developer owned on-campus P3 housing community within the California State University system and is targeted to deliver in fall of 2020. We are currently under construction on 6 owned developments and presales for delivery in 2019 and 2020 totaling 3,744 beds and $534 million with all projects targeting between a 6.25% to 6.75% nominal yield for development and 5.75% to 6.25% for presales. In addition, we are on schedule to break ground on our 10,440-bed, $615 million development on the campus of Walt Disney World in Q4 of this year, subject to final project feasibility and receipt of final permits. The first phase will deliver in May 2020 and, upon completion of the final phase in 2023, we expect to achieve a 6.8% nominal yield.

With regards to on-campus third-party development, we continue to progress on our 4 projects under construction on the campuses of the University of California, Irvine, the University of Arizona, the University of Illinois, Chicago and Delaware State. All 4 projects are targeted to open in fall 2019 and generate $15.9 million in development fees.

We are pleased to announce, we have been awarded a fifth development on the campus of the University of California, Irvine. The project is in predevelopment and is expected to deliver in 2021.

Turning to the investment market. We continue to see tremendous private investor interest in this sector. With the sale of EDR to both Greystar and Blackstone that was completed in September, transaction volume to the third quarter totals over $12.8 million eclipsing the all-time volume of annual investment in the sector according to the BAML HFF third quarter market update. With the significant amount of transactions on the market are under contract, most brokers are anticipating a strong fourth quarter of investment activity.

With that, I will now turn it over to Daniel to discuss our financial results.

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [6]

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Thanks, William. As reported, total FFOM for the quarter -- third quarter of 2018 was $60.6 million or $0.44 per fully diluted share. Results for the quarter were in line with our expectations. Compared to the third quarter of 2017, FFOM declined approximately 2% due to $614 million of capital recycling activity completed in the second quarter of 2018, resulting in lost NOI and noncontrolling interest for approximately $5 million and $2.9 million in higher third-party fee income in the third quarter of 2017 associated with the closing of UCI for development.

As Jennifer discussed, our same store operating results were strong at 4.5% NOI growth, but also in line with our expectations. As always, the third quarter is a mix of 2 academic years, the final summer months of the '17-'18 academic year and the very beginning of the '18-'19 academic year, that both influence the same store revenue growth for the quarter. Accordingly, the third quarter same store revenue growth of 2% includes the lower revenue growth coming off of the fall 2017 lease-up.

With regard to same store operating expenses, we achieved a 0.2% reduction expenses for the quarter. As we have discussed throughout this year, we expected to generate expense savings in the third quarter due to the benefits of the cost control initiatives associated with our Asset Management program as well as significant hurricane expenses incurred in the prior year quarter. As we look to the fourth quarter of 2018, we do expect an increase in same store operating expenses growth given that we achieved a 1.8% reduction in operating expenses in the fourth quarter of 2017 when some of our current phase of expense control initiatives started to materialize.

From a balance sheet perspective, as of September 30, the company's debt-to-enterprise value was 34.3%, debt-to-total asset value was 36.2% and the net debt to run rate EBITDA was 6.2x. Our floating rate debt now stands at 17.3% of total debt. As you will see in our supplemental, we have updated our capital allocation and long-term funding plan on Page S-16 to reflect the completion of the 2018 development projects. And with the commencement of the San Francisco state ACE development, we have now incorporated our first 2020 development outside of the Disney Student Housing Project announced last quarter. Including the current 2019 and '20 owned presale developments and the first phases of Disney expected to be delivered in late 2020, we have approximately $650 million in development costs, which we expand -- expect to fund throughout 2019 and '20 with a mix of cash on hand, cash flow available for reinvestment and $450 million to $500 million of additional debt, equity and/or joint venture and disposition capital over the next 2 years.

As always, we will monitor the markets and access the most attractive sources of capital throughout this time period, both from a weighted average cost of capital's perspective and with a focus on maintaining the health of our balance sheet.

With that in mind, until we see an improvement in the cost of our equity, we will look to take advantage of the very high demand environment we are seeing for core student housing from private capital around the globe through a continuation of our annual capital recycling program.

Turning now to our 2018 earnings outlook. Taking into consideration the results of the fall 2018 lease-up and operating performance through the third quarter as well as expectations for the remainder of the year, we are tightening our 2018 FFOM guidance range to $2.29 to $2.33 for fully diluted share and maintaining the expected midpoint of $2.31 per share. All changes to the components of guidance were net neutral to the previous midpoint of same store NOI, total NOI and overall FFOM and are detailed on Pages S-17 and S-19 of the earnings supplemental.

With that, I'll turn it back to the operator to start the question-and-answer portion of the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Juan Sanabria with Bank of America.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [2]

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Just a question on the developments. It looks like you lowered the high end of your yield target 25 basis points to 6.75%. Is there anything, in particular, that drove that? Is it higher costs, is it skewed by having more ACE developments? And if you could just comment if the next school year's lease-ups, if you're targeting for those to be stabilized year 1, or if you think there's a possibility those could be 2-year stabilizations?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [3]

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Yes, Juan, if you look at the high-end of that range, we've had it at 7% really for the last 5 years. And when you look at most of the transaction we are doing are coming in between that 6.25%, 6.75%. In large part, there are higher percentage of ACE, as you pointed out. The key point that I would make there is that cap rates over that point in time have come down probably 100 basis points. And so when you look at the spread of that 6.25% to 6.75%, at cap rates being between 4%, 4.5%, the accretive spread from those development -- targeted development yields to current market cap rates have significantly expanded. Also, to the second part of your question, as you saw this year, we do believe that all of the developments that we are targeting to come online in fall of 2019 will stabilize year 1 just as you saw the current 2018 portfolio come in at that 97%.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [4]

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Great. And then just on the sources and uses, if you look at what you have out for a couple of years, it's about $150 million per year, about $600 million in total, it would be funded, I guess, with dispositions of your other sources, is that front-end loaded given some of the Disney spend and the developments or should we think about that roughly $150 million per year being ratably spread over the next few years?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [5]

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Generally, I think it could be ratably spread throughout 2023. That being said, as you look at the needs of throughout 2019 and '20, we've got about $650 million of funding needs. If you look at the cash on hand and free cash flow available for reinvestment, that would leave about $480 million to be funded from debt and/or equity or dispositions. If we're targeting in the short term that mid-30s debt to asset value, low 6s,, high 5s debt-to-EBITDA, that would be a mix of about $100 million in debt and $370 million in dispositions. So implying that we would still be in that $150 million to $200 million over the next couple of years. Of course, given the outlook for the cap rate environment it's something we will take into consideration or at least our expectation on the outlook and as to whether or not we choose to do any of that earlier to make sure we monetize it at attractive valuations.

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Operator [6]

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Our next question comes from Nick Joseph with Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [7]

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Just keeping your sources and uses that you outlined on S-16, what's the current appetite for acquisitions or presale deals beyond what you've already committed to?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [8]

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Yes, no, Nick, at this point in time, as William I think mentioned in his script, developments continues to be our absolute highest and only focus on investment. Certainly, presale developments as it relates to getting yields at the 5.75% to 6.25% depending upon market and growth profile, it can be attractive also, but certainly our own accretive developments are the #1 priority of the company.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [9]

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And for the 97% occupancy this academic year, what percentage of beds are December-ending leases? And how does that compare to last year?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [10]

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It is relatively on par with last year. I think on the entire portfolio we ended up with 100 more December-ending leases. And so nothing material that gives us concern in terms of our fall off from fall to spring occupancy would be anything more than it traditionally is.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [11]

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And just finally, now that overall occupancy is back to its long-term average, do you think that 2.25% rental revenue growth midpoint is a good longer-term rent growth run rate?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [12]

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I think this year you have a little bit more headwinds perhaps in Tallahassee that we mentioned that has a little bit of a drag on that. I think the historical run rate is more closer to 2.5%, continues to be the 2.5% to 2.6% what I would say is more of your long term. Tallahassee, as I mentioned in my comments, will be a little bit of a tough comp going forward this year with the new supply coming in, which I think is a little bit of drag on the revenue numbers. But overall, as Jennifer mentioned in her script, that 97% -- I think our historical average is still 97.6%. And so you've got potential 60 points basis of occupancy to our historical averages that, coupled with rate growth, that 2.25% is something we're really comfortable with.

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Operator [13]

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The next question comes from Samir Khanal with Evercore.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [14]

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As you sit here today, can you talk about some of the markets that may be at risk beyond, sort of the ones we've -- like, there's Austin, Tallahassee, College Station, Florida State, I mean are there any other that's kind of in your radar from a supply standpoint at this time?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [15]

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From a supply perspective, as I mentioned in my comments, we actually feel better about going into next year supply than even '18 -- while it's up nominally 2,000 beds across the portfolio, as I mentioned, that's in 34 markets versus 26 last year, also 20 of those 34 had no development last year. And so the natural barriers to entry in the space continue to be prudent. I mentioned that the new supply coming online is 1.3% of enrollment, which mirrors what the 14-year average has been since we went public. Certainly, as we mentioned, the focus markets from last year, Tallahassee is the only one that really was tough -- a little tougher than expected. And as we go into next year, we've set rates there down 2% going in, that's why the comment to Nick about Tallahassee being a little bit of a drag on the overall portfolio. But Austin continued to perform well and have good same store NOI growth and what people thought was going to be a challenging year in Austin continued to contribute positively. College Station, again, kudos to the team, we're at 97-plus-percent occupancy there, up 160 basis points from last year. We're also pleased to see the College Station market as a whole reach 90%. Last year, it was down in the low 80s. And so you're starting to see some of that absorption in the prior year's enrollment growth kick in. And in all the other markets across the top 10, as I mentioned, we'll have 18% of our NOI. And so it's more normal and ordinary supply as you've seen to historical content. So I don't think supply, other than we do point out Tallahassee is a market just given the dynamic there, that it's not a high enrollment growth school when you have another tranche coming on next year of good pedestrian supply that we think will have short-term absorption pressures. But shy of that, it's really more of the normal, consistent supply versus demand curb that we've seen in the space for the last 12, 15 years.

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Operator [16]

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Next question comes from Drew Babin with Baird.

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Alexander J. Kubicek, Robert W. Baird & Co. Incorporated, Research Division - Research Analyst [17]

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This is Alex Kubicek on for Drew. Generally looking for some color on how the Core Spaces acquisition assets performed in the '18-'19 lease-up? And how do you expect them to perform in your '19-'20 expectations?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [18]

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Yes, 4 came in right at about 96%, which is right in line with the expectations. And we haven't given specific guidance by portfolio but I'll -- with the 97% occupancy average, the midpoint of our guidance, I would say, we expect that subcomponent to operate less than that. So a little bit of room for improvement there, 100 basis points of occupancy I would say built into that.

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Alexander J. Kubicek, Robert W. Baird & Co. Incorporated, Research Division - Research Analyst [19]

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Great. That's really helpful. So assuming the '19-'20 lease-up is more rate driven given tougher occupancy comps, do you expect a similar distribution of rent growth outcomes for the assets and given the occupancy buckets you provide in the supplemental? I mean, are you guys more hesitant to push rate on those properties that are under 95% until the occupancy kind of breaks that threshold?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [20]

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That's a great question. And if you look at the breakdown on -- currently on Page S-8 of the supplemental, and you look at that first category, this year, where the properties that were 98% or greater contributed 3.8% rental rate growth, I would point out that all of our Tallahassee properties from the year before were in that bucket. And so that 3.8% strong growth well above the median in the portfolio was including Tallahassee being in that bucket. Well, Tallahassee is now in the lower bucket of the 95% or below. That 98% or above currently consists going into next year of 59,000 beds or 63% of our portfolio, so a little higher average. And I would say that category has greater pricing potential this year than last because of the makeup of what is in there. As it relates to the bucket that is 95% and below, this is one where we do not, in any form or fashion, get hung up with what the headline rental rate number is on that, in that it's all about maximization of rental revenue. And so we will always in that category, market-by-market, I mentioned Tallahassee, Tallahassee we ended up in the market coming about 92% occupancy. And we're down on setting rates in that market next year targeting about 2% below that currently, but we believe we got 700 bps of occupancy to make up for it. And so when you look at that category this year, it was the greatest contributor with rental rate growth -- I'm sorry, with rental revenue growth being 6.1%. And so we were really agnostic as to how that growth ultimately materializes. And so it's not unusual for us to see -- look, this year we had a great opportunity with that portfolio being at 84.1%. And you saw us make hay with where that group leased-up to with the 92.8%. The last time we saw that much occupancy potential in that category was back in '08 when we brought GMH. And you saw the same type of metrics as you see on this page in terms of that year we had rental rate down in that category to produce that growth. It also gives you a good foundation of rental rate off of which to grow going into the future years, which you'll see in that portfolio this year as it moves in. So yes, you'll see a consistent, probably management of rate versus occupancy in that category as you've seen previously.

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Alexander J. Kubicek, Robert W. Baird & Co. Incorporated, Research Division - Research Analyst [21]

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That's really helpful. One more question from me. We were curious whether this year's lease-up exposed any indications of distress amongst the private developers. And if so, whether any opportunities exist where ACC might seek to acquire some of those properties down the road?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [22]

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Here's the one thing and if any of you all visited the NMHC Student Housing Conference. One of the questions that was asked there in my panel. There was a quote by Chris Merrill that they asked us to comment on at Harrison Street. You have a lot of the -- what had been merchant developers in the space that now have equity available to them with the global influx of capital, and they are now looking at longer hold periods. And for the first time in their company's history, turning from a merchant developer where they have 1- or 2-year old properties they stabilize and flip into now going to operate those properties on a more of 3- to 5-year horizon. And candidly, we are 2 to 3 years into that. Our greatest opportunities for growth have come in past years when the acquisition and the consolidation cycles were in play and people that were attempting to build larger portfolios don't have the operating platform that we do and it creates the opportunities for us when we do get back into an acquisition mode to create that upside in occupancy. And so I think that you will see over the next, let's call it 3 to 7 years in the cycle, maybe 2 to 7 years in the cycle, start to see some of those shorter-term funds, 3 to 5 years, that are putting those portfolios together with folks that had been merchant developers come to market. And those portfolios are going to offer more operational upside than what you've seen in the last 2 to 3 years, with the first year stabilization taking place and then it flips. And so I do think from an investment trend perspective -- and again, we're completely out of the acquisition game at the moment, but the cycles will come and go, and there will be a point in time where we'll back in and I do think over the decades-long strategic plan we will be the industry consolidator. And you will see those opportunities for us to have more growth potential organically as we integrate larger M&A opportunities down the road that have that operational upside.

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Operator [23]

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The next question comes from Alexander Goldfarb with Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [24]

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So just a few quick questions here. One of the things certainly was the topic on last quarter's call was the ability for you guys to grow in 2019 after you guys have done the balance sheet and portfolio repositionings. So can we just talk about 2 items. One, Daniel the cost efficiencies you mentioned. Hurricane was a positive this quarter, but also some cost saves. So how much cost saves given that you're going to have like the 2.25%, sort of, midpoint on revenue sounds like operating expenses are going to be key to driving NOI next year. And then two, on the capital markets front, we can get a sense where bond yields are, but just curious on the dispositions side assume that any dispositions would be for handles rather than higher capital assets. So if you could just provide a little comment on 2 of those as we think about 2019 and earnings growth.

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [25]

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Sure. Obviously, we certainly know that the market would like to see a return to more normalized earnings per share growth as would we. As we get ready to give guidance on the next call, the things that we'll be assessing throughout the rest of the year here are exactly as you point out. On the same store NOI growth, the revenue side is laid out. You have the lease-up from this fall generating 3.6% opening revenue growth. The 2.25% that you just referenced is for next fall. When you bring the 2 of those together and the seasonality that impacts the summer months, you're going to come up with something in the high 2s in terms of revenue growth. So the other side of the NOI equation is what we can do on the operating expense side. We have seen a lot of benefits of the Asset Management initiatives. We think over the long term that there are continued benefits from that. Whether or not those will generate additional savings relative to this year is hard to determine at this point. Also when you consider that property taxes are 25% of our operating expense budget, if you're seeing 5-plus-percent kind of growth in your property taxes, you would have to have 2% growth in the rest of your more controllable operating expenses to keep same store operating expense growth around 3%. So that's the real mover that, unfortunately, we can't control the property taxes. So as the assessments come in through the end of the year here, we'll get a better handle on that and our thoughts for next year and what we will do for guidance. The second part of the equation is, what we do on the capital front. As you mentioned, we know where bond yields are today. As we look at bonds or other sources of long-term debt capital that we might use to term out our floating rate debt, that can have an impact. So we will look at what triggers we want to pull there and with the idea of, obviously, managing our exposure to the interest-rate market for the long term, but also trying to generate earnings growth. And then lastly, on dispositions. As I've talked about on earlier question, we can do about $150 million to $200 million of dispositions a year to manage the funding needs, which is very reasonable through 2023. Whether or not we decide to go ahead and do any of that earlier, though, is what can certainly swing earnings. We like where the cap rate environment is today and being able to monetize assets in that 4% to 4.5% range. Those are the types of assets that we would be looking at recycling, but whether or not we want to do more of it could certainly have an impact on earnings. So we will -- we always at this time of year are going through a full assessment of the portfolio now that we've completed the lease-up and seeing what markets we think it's the right time to go ahead and harvest capital in and that will drive how much we come out with in terms of a guidance for dispositions. I think the $200 million that we talked about on the last call is still a decent starting point for people to think about, and then we will look about whether or not we're going to do $150 million or $300 million next year and give that as part of our guidance.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [26]

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Okay. And then my second question is for Bill. Bill, on the revenue expectations for the next full year the 1.5% to 3%, at the low end, at the 1.5%, if you described a scenario where the supply outlook is improving, it's spread over a lot more markets and it's less of your NOI impacted, I understand Tallahassee, but every year there's always some sort of market that's an issue. What would cause revenue growth to only be 1.5%? What are some of the negatives that go there versus something in the 2% to 3% range?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [27]

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Yes, just all occupancy variation, Alex. I mean as you finish out the lease-up on a portfolio of 168 properties and look at all of the potential outcomes throughout the marketplaces, you could collectively end up at a lower occupancy based on small, minute variations in numerous markets. And so it's just all part of a potential realistic range of outcomes. It would -- certainly, from a rate perspective, to fall very low in occupancy and have your rate diminishment follow to that level, that would be a rare situation that we haven't seen occur, knock on wood, throughout the portfolio where you've seen both of those instances happen. And so the 1.5% to 3% is something that, as Jennifer mentioned in her comments, with the 97% occupancy, that is a variation that is pretty much predicated upon your rental rate variation throughout the lease-up. And so as we did mention, the percent of the portfolio in those top 10 supply markets is only 18% of the NOI this year versus 30%. And so the overall profile is one that we're comfortable with in terms of that 1.5% to 3% being a very realistic range that we can operate within.

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Operator [28]

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Next question comes from Austin Wurschmidt with KeyBanc Capital Markets.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [29]

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I wanted to touch a little bit on the capital allocation side. And you talked about potentially evaluating some of the presale deals to the extent they were in the right markets with the right growth. But just curious with the stock trading off today, I've got it trading at a 6 implied cap rate, my number is something probably higher after today's move, and you start to approach a development-type yield on your existing portfolio. Given the transaction environment, would you consider selling additional assets to buy back stock?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [30]

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I would tell you the first comment you made there was around presales and certainly, in the environment that we're in, that drops on the priority list. The developments, as Bill talked about, remain the top priority. We do have a development pipeline through 2023, not obviously, completely to the size that we've had historically, but we've got an in-place development pipeline that we need to address. And so the first priority would be recycling assets to make sure we're in a strong position to fund that. We don't want to be putting ourselves in a situation where we're using our capital from recycling to buy back stock and then get stuck in a position where we would have to drive up leverage to complete our development pipeline. So the question that you always go to when you're talking about stock buybacks is how persistent is the discount going to be on your stock price and is it something that is going to persist for several years to where you can make a fundamental shift in your strategy, but until we see something like that develop, we are going to be focused on making sure we're in a position to manage the help of the balance sheet and complete the development pipeline we have in place, which will create value.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [31]

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Appreciate your comments there. And, Bill, from your comments, with regard to Alex's question, it seems like the 1.5% to 3% range is the range you're very comfortable with, I would say, in the current environment and even speaking to the properties this year that were 95% and above occupied achieved revenue growth of 3%. And so it seems like that's a fairly reasonable range and something, I guess, that setting a little bit of a lower bar versus the prior couple of years. How will you think about evaluating, reassessing that range given you did that a few times this year and ultimately, there is a little bit of more challenged market conditions in a market like Tallahassee that ultimately had you come in a little softer than expected towards the end of the pre-leasing season.

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [32]

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Yes. Certainly, those last 2 years of reassessing that range is in part -- when we look at that 1.5% to 3% being very realistic given the current market conditions and the outcome, we do believe that's a good realistic basis for our guidance moving into next year and something we are comfortable with it. It is based upon where actual current market conditions are in the lease-up we've just gone through and how we believe the opportunity is to perform.

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Operator [33]

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(Operator Instructions) Next question comes from John Pawlowski with Green Street Advisors.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [34]

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Just sticking with the guidance for next year's lease-up. I was just curious about the process on supply growth and you went through Axio's numbers. The short question is, do you just take Axio's supply growth forecast? Is that embedded in the 2%, 2.5% at the midpoint?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [35]

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No. I mean certainly, we look at Axio in terms of the industry fundamentals statements that we make. But we have absolute rock solid data in our markets that we operate in that we share with Axio to make sure that they have everything consolidated into their projections and utilize that market-by-market data in relation to our own portfolio. And that is a very in-depth -- I'll give you an example here, and just to take you through. So you look at the development that is taking place at Florida State and where we mentioned Florida State. Most of that development that is taking place at Florida State is core pedestrian properties, in close proximity of the campus that are direct competitive comps to the current assets that we own in that marketplace and we evaluate what those particular assets coming in impact may be on our rental rate growth ability and velocity of leasing. By contrast, you look at San Marcos, which is in the top 10, all of that development coming in at San Marcos is more of a long bicycle, candidly more of a drive portfolio of properties being developed versus our core pedestrian across the street. And so the impact of new development in those 2 markets is completely different as we assess our own assets individually in setting rates for last year and how it may impact velocity. Then we utilize the LAMS program week by week, day by day to validate the initial strategic decisions that we're making off of what I just mentioned in terms of managing that throughout the process. So the Axiometrics level is great to determine the broader macro for the environment. We drill down much more intimately with our own data in the markets we're operating on and assess that direct competitive impact versus just the market.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [36]

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Is that direct competitive ring you draw around properties, is it processed the same for this year process versus last year in terms of the how wide you set that competitive range?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [37]

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Yes. It is -- and it is very -- that is probably the most intimate part of our rate setting process that we do. And at times it comes down to -- at the end of the rental rate process, candidly, the team will schedule the meeting with me and Jim and Jennifer, where we'll go through the 3 or 4 markets that look the most challenging or where there's perhaps a variation of opinion in terms of what are the direct competitive -- this year, one of the greatest examples we had in our portfolio is Syracuse, that if you talk to our competitors they'll tell you that's one of the toughest comps. And we did very well in Syracuse last year and people -- if EdR was still public they would be commenting on Syracuse as one of the markets they are most concerned about. We're virtually done with our lease-up in Syracuse for next year with solid metrics because of how we analyzed that direct competitive comp versus what was happening in the marketplace. And so it really is a market-by-market assessment. Your data and your business intelligence gives you data points to study and to look at, but at the end of day and this is where American Campus and why you see the 14 years of consecutive growth, at the end of the day there is always a little bit of human subjectivity that has to come into making the calls in the tougher markets.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [38]

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Okay. And Syracuse, since you mentioned it, just as an example of a University that's pushed for on-campus mandates for sophomores and even debating juniors living on-campus. Just curious any of your other schools, are they currently evaluating on campus -- mandatory on-campus living for upper classes?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [39]

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Not to -- those -- if you look over the 15 years that we've been public, those situations have been few and far between. And so Syracuse doing -- this is where investment criteria selection are paramount. And if we look in our assets in Syracuse and why we're doing very well is because we are in those core pedestrian legacy sites that are comparable in location to the on-campus housing. And the people that are getting hurt are those properties that are further out from campus that don't perform as well. But across -- now sometimes you've seen those housing initiatives take place. For example, you see ASU went from no housing policy to a on-campus expectation for freshman, largely driven by us and all of our investment on-campus. And so -- the one thing I would say as a general statement is that we have always said at American Campus, even where we own off-campus properties and don't have any investment on-campus, we like to see the University having a very large -- and we don't mind if it is an increasing, on-campus base, whether it's a first year housing requirement or a first year and a sophomore because the most likely tenant to live in an American Campus Community where we focus on emulating an academic environment just like the University does, those are our #1 target market each year. And so if we see an institute -- for example, this year at Virginia Commonwealth University, we opened an ACE transaction. There was a 1,200-bed facility that was adding to the number of residence hall beds on-campus. It wasn't a change in policy, but there were 1,200 more residence hall beds on-campus than previous that we brought online. We also own 3 off-campus assets that have a little bit of a variation in their occupancy this year because of those 1,200 beds we brought on. Long term, those 3 apartment complexes we own off-campus are going to have better prospects every year because of those 1,200 extra beds feeding off-campus every year. And so that's not necessarily a negative thing when universities do that if we own the right assets in the right location.

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Operator [40]

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This concludes our question-and-answer session. I would now like to turn the conference back over to Bill Bayless for any closing remarks.

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [41]

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Yes, we want to thank you for joining us as we did discuss our Q3 results. I do want to give a special thanks to the American Campus team. As always, you all delivered again this Fall and led the industry once again, and it's also we're celebrating our 25th anniversary, and so I want to thank you for the decades of hard work that you've put forth that have made American Campus the best-in-class company. We look forward to visiting with the rest of you in November out at NAREIT and talking with you about the opportunities we have at that time. Thanks so much.

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Operator [42]

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This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.